Wealth Building for Business Owners of Color: A Whole-Person Approach

By Cynthia Terry, Director of Entrepreneurship and
Dr. Elaine Crutchfield, Director of Program Support Service

“If you’re talking about growing Black-owned businesses and you’re not also talking Black wealth, you are missing the transformational community opportunity.”

Melvin J. Gravely, civic leader, CEO and author of Dear White Friend: The Realities of Race, the Power of Relationships and our Path to Equity.

The following is the first is a series exploring racial equity, wealth building for business owners of color and what Communities Unlimited has learned from a quarter of a century working side-by-side with entrepreneurs of color in the South and in communities where people are tearing away the limitations on economic growth based on the color of skin, the address where live or how much money you have in a bank. There is no easy answer and you will not find the ubiquitous “silver bullet” or a “sixteen-step curriculum for success.”

We will share what we have learned from the entrepreneurs that give us an opportunity to work with them – both those that achieve their goals and those that do not.

Entrepreneurs like Doshon Johnson, who owns Urban Heights Investment, LLC with his wife, Latisha Johnson, and describes himself as someone born into generational poverty, that understands there has to be a new learning curve, that could not find a bank to provide start-up financing (don’t worry Communities Unlimited did through our CDFI), and who wants to do business on another level so he can give back and teach others in his community how to build wealth.

In this series, Cynthia Terry, Director of Entrepreneurship, Communities Unlimited, will introduce the concept of eWealth Health©2022, wealth building for entrepreneurs of color that is centered around the “whole person.”  Ms. Terry, herself a successful entrepreneur of color and owner of multiple businesses, explains: “We need to do more than celebrate a start-up’s survival to year five and beyond. If its year 5 and the business is making a profit and nothing else has changed for that entrepreneur of color – why not! Closing the wealth gap means that business has to increase that Black or Brown owner’s personal net worth.

eWealth Health©2022 transitions entrepreneurs from the traditional technical assistance focus on start-up, profit, and growth to an intentional goal of wealth creation – from the very start. Unlike tech-accelerators across the country that hope to engage entrepreneurs of color in developing high-profit products and services, CU’s approach is industry agnostic. We meet every entrepreneur where they are. This does not mean our services are not scalable or replicable. It is about the business consultant or technical assistance provider making an intentional mind-shift. More details on that to come.

To begin, the passion to change the wealth gap in America is a great thing.

One needs to learn from those living on both sides of the gap and from research that distills a lot of data into a few key valuable insights:

  • What causes the racial wealth gap?
  • What are the best options for closing the racial wealth gap?
  • What is needed for entrepreneurs of color to build wealth through business ownership?

Wealth is a reflection of a system, in this discussion a family’s economic system where the value of the whole is not only a sum of the parts. Family or household wealth is influenced by the assets owned, the type of asset, in some cases the location of that asset (e.g. real estate), investments, savings, retirement accounts, among other things often acquired with income influenced by education.

This system has been influenced over multiple generations by many things, including:

  • Forced seizure of black-owned land and assets through violence and corruption targeting people of color.
  • Exclusion of people of color from receiving G.I. Bill benefits following the World War.
  • Discrimination in housing markets impacting both the value of homes owned by people of color (i.e. red-lining; intentional placement of interstates and infrastructure to isolate communities of color) and mortgage access (i.e. discriminatory interest rates, predatory foreclosures).
  • Modern inequity in access to high wage job training and education, access to affordable health care/insurance, access to jobs, and criminal justice.

Today, Black households hold an average of 29 cents for every dollar of wealth held by white households (2019 SIPP)[I].

Circle Graph showing Zero or negative household Net worth by race and household net worth greater than $500,000 by race
Graph showing percent distribution of household net worth by race

Median household wealth where children are present is about 50% of households without children. Low-wealth child households are disproportionately non-white, with many Black and Brown households with children have almost zero wealth.[ii] The decreasing wealth in families of color with children has been shown to negatively impact early adult decisions[iii], attendance and completion of college, standardized test scores[iv], social-emotional functioning[v], the educational achievement of children in K-12 programs, and physical health.[vi]

The wealth gap is growing faster in households with black and brown children than it is among others.[vii] Research linked wealth, adult health, and confirms how future generations cycle into their own low-wealth household economy.[viii]

Now research is showing us what so many families have lived from one generation to the next. The pre-existing condition of low household wealth negatively impacts child health and that child’s future opportunity to earn wealth.  Children who grow up in low-wealth households are significantly likely to have higher BMI scores and related negative health impacts and are likely to have low wealth as adults.[ix]

The wealth gap comes from a national economic system that intentionally and systematically empowered white family wealth and denied black and brown families access to the same opportunities. As Black and Brown households had less wealth generation after generation, the racial wealth gap expanded into a pre-existing condition exacerbated by the COVID-19 pandemic.[x]

What are the best options for closing the racial wealth gap?

It is not possible to ignore the role of public policy in forming and institutionalizing the inequities (e.g. housing, education, pay) that deeply infect the entire root system of our economy. Numerous scholars have documented these historic and continuing impacts on the racial wealth gap from Jim Crow, to “The Lost Year” in Little Rock, Arkansas, Black-owned farm land, redlining housing values, and today the praises for the financial technology sector and the decrease in racial discrimination in mortgage approval/denial rates while simultaneously using algorithms that use “factors other than race” that result in Black and Brown people paying $765 million in extra interest per year when compared to financially similar white borrowers[xi].”

To purge the root fungus from the system, the persistent trimming away of infected sections is necessary.  This requires a sustained and committed effort from those capable of address public policy to eliminate disparities in homeownership rates and returns, racial income and the ability to leverage income for wealth creation, education and business ownership. All are necessary and as the Congressional Black Caucus Foundation, Inc. research found, Entrepreneurship is a key pathway to narrowing the racial wealth gap. Why? Because, Black business owners have significantly more wealth than non-owner Black households; there is a long history of Black entrepreneurship in this nation; the over 2.5 million Black-owned businesses make valuable contributions to the national economy and create jobs; and a college degree is not essential to successful business ownership. While 57% of small business owners in the U.S. do not have degrees[xii], the value of educational attainment is not being dismissed.

In 2019 the Congressional Black Caucus Report found the median net worth for white business owners was 3 times higher than for Black business owners, which – while still in need of significant improvement – is better than total white population wealth which is 13 times that of Black Americans. [xiii]

 Entrepreneurship is a key pathway to narrowing the racial wealth gap.

Constraints on Black and Brown Entrepreneurship

There are deep roots of constraint seeded by generations of racism and inequitable access to opportunity and current conditions like the pandemic that impact small businesses. Research clearly illustrates disparities in racial wealth, which include the following key summary findings:

Lack of Access to Capital

Access to capital plays a pivotal role in the divide between Black and White-owned businesses and is the single greatest factor limiting growth.

  • “White-owned start-ups begin with an average of $106,720 in capital while Black-owned startups originate with an average of $35,205, and never catch up.” [xiv]
  • “At the outset, White business owners borrow six times as much as Black business owners.” Ibid
  • “Even when accounting for education, experience, and above-median credit scores, Black entrepreneurs are less likely to apply for a loan.” Ibid
  • Black-owned firms were more likely than White-owned firms to use personal funds for business operations,Ibid including personal credit cards. [xv]
  • Black-owned start-ups are about three (3) times less likely to be approved for a loan than white-owned start-ups even when the black and white entrepreneur have similar credit scores and net worth.[xvi]

Lack of Trust

The lack of trust in systems fraught with historic inequities, fear, and the struggle to meet basic “survival” needs that characterize life in lower income and low-wealth families all contribute to a lack of trust and a sense of “I’ve got to do this on my own.”

  • Shayla Nunnally, author of Trust in Black America: Race, Discrimination and Politics, describes Black Americans as “one of the least trusting groups in America,” based on both historical and individual experiences with racism.
  • Others describe the reluctance to trust as generational learning that stems from the struggle of not having enough or being afraid of not having enough.[xvii]
  • Black business owners with good credit scores report not applying for bank financing because they believe they will be denied. Actual denial rates and perceptions of financial relationships must change for a healthier supply of credit.[xviii]

Influence Of Geography

People of color often live in communities with a high percentage of people of color and these communities also are where historic racial disparities have impacted racial wealth for many generations (i.e. the Jim Crow South).

  • Black entrepreneurs are concentrated in the southern part of the country where poverty is higher and where Black entrepreneurs likely have even less wealth and access to resources.[xix]
  • Disparities in health insurance can contribute to both racial health and wealth gaps and health insurance gaps are more common in the South for Black families. Untreated or undiagnosed health issues can lead to more expensive, larger problems later in life.[xx]
  • In 2019, individuals without health insurance were more than twice as likely to forgo medical care as those with health insurance (48% versus 22%, respectively), and Black people in the South are less likely to have health insurance than white people.[xxi]

“When accounting for the racial wealth divide, the firms which use their own personal funds are drawing from lower wealth levels than their White counterparts. The unequal reliance on personal funds recreates wealth disparities, as minority firm owners drain their personal wealth while White owners expand theirs, as they are more financially capable to save their own personal funds and use their greater revenues to fund their businesses.”[xxii]

The cycle of racial inequality repeats.

Founder net worth and lower levels of all major sources of funding are symptoms of a more complex and much larger issue as briefly illuminated above.

This aligns with the observations of Communities Unlimited leadership after much reflection on a quarter century of work with entrepreneurs, the majority of whom represent a racial or ethnic minority.

How does Communities Unlimited know about Entrepreneurs of Color?

Communities Unlimited (CU) is a community development financial institution (CDFI) intent on participating in multiracial partnerships and coalitions. It has worked with entrepreneurs of color and rural small businesses the majority of whom are from the Mississippi River Delta region or communities in Texas where some call colonial[xxiii] home. These are areas characterized by historic and pervasive racism committed to denying people of color equitable opportunity.

In the past 24 months, through a pandemic, CU’s small business service included the following:

What does racial equity mean for Communities Unlimited?

For Communities Unlimited (CU), racial equity for entrepreneurs means developing an organizational culture and system of internal policies and practice that actually helps business owners of color start and grow a small business.

In CU’s lending practice, this means abandoning the norms of lending that undermine access to capital for business owners of color by turning traditional lending on its head. Relying on credit scores and collateral for loan decisions perpetuates barriers to capital for under-resourced entrepreneurs. Instead, Communities Unlimited de-risks supposedly “risky” loans through intensive technical assistance, helping the borrower determine exactly how much capital they need. This may seem a trivial issue—it is not. Many a business fails either by borrowing too little or too much. As a business meets or exceeds benchmark projections while making regular payments, follow-on loans meet the borrower’s growing capital needs.

For CU’s consultancy practice, racial equity for entrepreneurs means taking a whole-person approach to service delivery by identifying the inhibitors to the business growth and then developing a technical assistance plan that addresses those inhibitors. CU’s technical assistance plans are primarily one-on-one consulting engagements for 20 to 100 hours over weeks or several months helping strengthen business skills and business owner management capacity.

When a business client runs into an unexpected challenge, its CU consultant and technical assistance provider, who knows that business well, steps back in to assist the entrepreneur in problem-solving.  For loan clients, this often includes having the lending team step back in to restructure the business loan to create cashflow relief while the CU consultant works alongside the owner to revisit the business model or analyze costs and expenses to adjust the business financial model.

A key strategy is to look beyond business profitability to a “whole person” approach that focuses on key wealth building strategies including the well-planned sale and transition of businesses owned by people of color.

The targeted strategies vary depending on the entrepreneur, their family’s wealth, and the community in which they live. Key steps to helping all businesses thrive and build wealth include the following:

  • Secure equity capital so as not to rely on credit cards that ruin credit scores before a business even gets on its feet.
  • Develop strong financial and management systems to ensure the business becomes profitable.
  • Innovate process and products to become and remain competitive – whether the entrepreneur is operating a business that provides essential quality of life in their community or building a high-tech product.
  • Access capital to grow the business and purchase assets that appreciate and contribute to wealth-building.
  • Secure trusted investment advice to set up 401Ks or IRAs [individual retirement accounts] that build wealth.

Communities Unlimited has developed a new eWealth Health©2022 initiative to addresses the socioeconomic inhibitors to small business growth and wealth building for business owners of color by taking a whole person approach to serving the business owner.

The “Whole Person” approach as coined by Cynthia Terry, starts by meeting entrepreneurs where they are, in the moment, building a relationship and earning trust. This enables consulting to shift to a mind-set of “how do we accomplish” your goals and make certain you build wealth at the same time.

This paper will close with two example entrepreneurs of color that are even now building wealth through this this model. The next paper in the series will delve more deeply in the mind-shift required by the consultants providing entrepreneurs of color with initial technical assistance.

Sophisticatz Lounge: This client came to us seeking help to plan and start a new business – Lounge/bar. The client had no idea of what starting a business entailed, and we began working with her to conduct a feasibility study. The study highlighted server key factors for success that the client lacked to capacity to support. Subsequently, we developed a plan to enhance the client’s entrepreneurial capacity, improve her credit score, and educate her on the fundamental operational aspects of managing the business she was hoping to start. After working with the client over the last year, she is now poised to submit her business plan, and is capital-ready to acquire a loan to facilitate the startup of the business she has dreamed of starting.

C & A Trucking: The client had purchased a used dump truck and hired drivers to operate it. Initially, we sought help to obtain a $20K loan to buy a second used dump truck.  After conducting an Initial Assessment interview and reviewing the client’s P&L and operating data, it was determined that the client was losing more than $20K per year due to poor operational controls and poorly managed expenses. The client was misguided in thinking they could purchase a 2nd truck they could somehow move out of the red and into the black through volume.  As it turned out, such a move would have only doubled their losses. After working with the client to develop a proper operational cost structure, the client was able to begin managing/controlling their costs and move the company into a profitable operation without incurring any additional loans or capital investment. We also showed the client how they could make a much smaller investment of $3-$5K to purchase a used trailer that would allow them to diversify their service delivery and increase revenues by more than 100%.